Import quotas are then merely legal restrictions on the quantities of imports from the foreign sector that are imposed by the domestic government.

The goal of import quotas is to increase the limit the availability of imports in the domestic economy and thus encourage domestic consumers to purchase domestic production.

The Why of Import Quotas

• Domestic Employment: Because foreign imports are produced in other countries by foreign workers, decreasing imports and increasing domestic production also increases domestic employment.


• Low Foreign Wages: Restricting imports produced by foreign workers who receive lower wages "levels the competitive playing field" compared to domestic goods produced by higher paid domestic workers.


• Infant Industry: If foreign imports compete with a relatively young domestic industry that is not mature enough nor large enough to benefit from economies of scale, then import quotas protect the "infant industry" while it matures and develops.


• Unfair Trade: The foreign imports might be sold at lower prices in the domestic economy because foreign producers engage in unfair trade practices, such as "dumping" imports at prices below production cost. Import quotas seek to prevent foreign producers such activity.


• National Security: Import quotas can also discourage imports and encourage domestic production of goods that are deemed critical to the security of the national economy.

Sundial Imports to Csonda: An Example

The left panel in this exhibit contains the domestic Csondan market for sundials. The domestic market demand is represented by the negatively-sloped demand curve, labeled Dc. The domestic market supply is represented by the positively-sloped supply curve, labeled Sc. In the absence of imports, the domestic Csondan market achieves equilibrium at a price of 12 csonds (which is the domestic currency in Csonda). The quantity exchanged at this equilibrium is 200 sundials.

Imports of Queoldiolan sundials changes this domestic equilibrium. The right panel presents the international market for sundials. The import demand curve, labeled Dm, is the shortage derived from the Csondan sundial market for prices less than 12 csonds. The export supply curve, labeled Sx, is based on the surplus generated by the Queoldiolan sundial market (not shown) for prices above 8 csonds.

The international market achieves a sundial price of 10 csonds such that Csonda imports 100 sundials from Northwest Queoldiola. The goal of the Csondan Sundial Manufacturers Association is to reduce the quantity of imports and to increase the price. Click the [Imports] button to highlight this situation.

Now a Quota

• First, with fewer imports entering Csonda from Northwest Queoldiola, domestic producers are able to increase their quantity produced. The domestic quantity of Csondan sundials produced increases from 150 to 175. However, the combination of domestic production and imports (175 plus 50) generates a smaller consumption quantity after the quota is imposed than before (225 versus 250).


• Second, with these changes in quantity supplied and quantity demanded, the price increases from 10 csonds to 11 csonds, in accordance with the law of supply on the producing side and the law of demand on the consuming side.


• Third, domestic Csondan sundial manufacturers produce a larger quantity (175 versus 150) at a higher price (11 csonds versus 10 csonds). As a result, more revenue flows to the domestic Csonda producers. They are definitely better off, which is just the result they were seeking.


• Fourth, domestic Csondan sundial buyers consume a smaller quantity (225 versus 250), also at a higher price (11 csonds versus 10 csonds). They are paying more for sundials and receiving fewer sundials. As a result, they are worse off.


• Fifth, unlike a tariff, the Csondan government does not receive any tax revenue.

Two Other Foreign Trade Policies

• Tariffs: Tariffs are simply taxes imposed by the government of one nation on imports from other nations. They work like any other taxes. A tariff is added to the price of the imported good. The resulting price of the import is thus higher, which tends to decrease the quantity purchased. And if fewer imports are purchased, then more domestic production is sold. Of course, while domestic producers benefit from tariffs, domestic consumers tend to suffer. They pay higher prices for both imports and domestic production.


• Export Subsidies: An export subsidy is then a subsidy paid to domestic producers to encourage exports of production to the foreign sector. This export subsidization effectively increases the overall revenue received by the domestic firms when exporting production, which is bound to encourage exports. Export subsidies are usually justified as a means of helping domestic producers compete with lower cost imports. While imports might have lower costs due to comparative advantage, they also might be subsidized by foreign governments. Unlike tariffs and import quotas, domestic consumers, like domestic producers, tend to benefit from lower prices of both imports and domestic production. However, domestic taxpayers end up paying for this subsidization.